Terminating Employees in China: Legal Grounds, Severance, and Risk Management for WFOEs

The Legal Framework for Termination in China

Terminating an employee in China is not simply a matter of giving notice and paying out unused vacation days. China’s labor law framework — centered on the Labor Contract Law of the People’s Republic of China — establishes a statutory regime in which termination is permitted only on specified grounds, and in which the employer bears the burden of proving those grounds before an arbitration tribunal or court. For Wholly Foreign-Owned Enterprises operating in Guangzhou, Shenzhen, Foshan, Dongguan, and Jiangmen, understanding the rules that govern termination is not optional: it is a core compliance obligation that directly affects financial liability and operational stability.

This article explains the lawful grounds on which a WFOE may terminate an employment relationship, how severance is calculated, which categories of employees enjoy special protection from dismissal, and the procedural steps an employer must follow to minimize the risk of a successful labor arbitration claim.

Lawful Grounds for Termination

Under Chinese labor law, the employer may unilaterally terminate an employment contract only in the circumstances enumerated in the Labor Contract Law. These fall into three broad categories:

1. Termination during the probation period. If an employee is found not to meet the conditions of employment during the probation period — provided those conditions were clearly stated in the employment contract or a written job description acknowledged by the employee — the employer may terminate the contract without paying severance. The employer must produce evidence that the employee failed to satisfy the stated conditions. A general assertion of “unsatisfactory performance” is not sufficient; the standard applied by labor arbitration tribunals in Guangdong is that the employer must demonstrate, with contemporaneous records, that the employee did not meet specific, measurable criteria.

2. Termination for cause. An employer may dismiss an employee without severance if the employee commits a serious violation of company rules, engages in gross negligence or fraud causing material damage to the employer, is subject to criminal investigation, or simultaneously maintains an employment relationship with another employer that interferes with the performance of their duties. The key term is “serious” — a minor infraction does not support termination for cause. The employer’s internal rules must define what constitutes a serious violation, those rules must have been lawfully adopted and communicated to the employee, and the employer must be able to prove both the violation and the communication.

3. Termination with notice or payment in lieu. An employer may terminate an employee upon 30 days’ written notice (or payment of one month’s salary in lieu of notice) in three situations: the employee is unable to perform their original work after completing a statutory medical treatment period for a non-work-related illness or injury and cannot be reassigned to suitable alternative work; the employee is incompetent and remains incompetent after training or reassignment; or a major change in the objective circumstances on which the contract was based renders performance impossible and the parties cannot agree on modification of the contract. In all three cases, severance is payable.

4. Economic layoffs are a distinct category governed by separate rules, discussed in a later section.

Severance Payment Calculation Rules

Where severance is payable — which is the case in most termination scenarios other than termination for cause or termination during probation — the statutory formula is:

Severance = Average Monthly Salary × Years of Service

The “Average Monthly Salary” is the employee’s average monthly wage over the 12 months preceding termination. If the employee has worked for less than 12 months, the average is calculated over the actual period of employment. The salary base includes base pay, regular allowances, bonuses, and overtime pay — essentially all compensation that is subject to individual income tax and social insurance contributions.

Each full year of service counts as one month of severance. A partial year of six months or more counts as a full year; a partial year of less than six months counts as half a month. The “Years of Service” calculation runs from the date the employee commenced work. If the employer is a successor entity — for example, if the WFOE was converted from a representative office or if the employee was transferred from a related entity — the employee’s continuous service with the predecessor entity must be included in the service period for severance purposes.

Severance caps apply: If the employee’s average monthly salary exceeds three times the local average monthly salary published by the municipal government, the severance calculation base is capped at three times the local average salary, and the maximum severance period is capped at 12 months. In Shenzhen, where the published average salary is among the highest in China, this cap is significant for senior executives and highly compensated employees. In Guangzhou, Foshan, Dongguan, and Jiangmen, the caps are lower but apply by the same principle.

Example: An employee in Guangzhou with 8 years of service and an average monthly salary of RMB 25,000 — exceeding the triple-average cap — would receive severance of (capped base) × 8 months, up to a maximum of 12 months. The precise cap figure is published annually and must be checked at the time of termination.

Employees Protected from Termination

Several categories of employees enjoy special protection from termination. A WFOE may not terminate these employees under the “30-day notice” or economic layoff provisions, though termination for cause remains available if the grounds are established:

• Employees who have been engaged in work exposing them to occupational disease hazards and have not undergone a pre-departure occupational health examination, or who are suspected of having contracted an occupational disease and are under diagnosis or medical observation
• Employees who have suffered a work-related injury or occupational disease and have been confirmed to have partially or wholly lost the capacity to work
• Employees who are within the statutory medical treatment period for a non-work-related illness or injury
• Female employees during pregnancy, maternity leave, or the breastfeeding period
• Employees who have worked continuously for at least 15 years and are within 5 years of the statutory retirement age

If a WFOE terminates an employee in a protected category and the termination is challenged, the termination will almost certainly be ruled unlawful. The remedy is reinstatement or, if the employee does not seek reinstatement, double severance.

Mutual Separation Agreements

A mutual separation agreement — in which the employer and employee agree to terminate the employment relationship on negotiated terms — is the most common and generally the safest method of effecting a termination in China. The Labor Contract Law explicitly permits the parties to an employment contract to terminate it by mutual agreement, and a properly executed mutual separation agreement largely insulates the employer from subsequent labor arbitration claims.

Three conditions must be met for a mutual separation agreement to be valid:

1. The agreement must be genuinely voluntary. Evidence of coercion, misrepresentation, or the exploitation of the employee’s ignorance will invalidate the agreement.
2. The agreement must set out a final settlement of all claims arising from the employment relationship and its termination. A general release clause is essential.
3. The consideration payable to the employee must not be manifestly unreasonable. As a rule of thumb, an amount not materially less than the statutory severance entitlement will generally be accepted by an arbitration tribunal as adequate consideration. An amount significantly below statutory severance, by contrast, is vulnerable to challenge on the ground that the employee did not understand what they were giving up.

In practice, many WFOEs in Guangzhou, Shenzhen, and Foshan manage terminations by offering a separation package equal to or slightly exceeding the statutory severance amount in exchange for a signed mutual separation agreement with a comprehensive release. While this involves paying severance even in cases where statutory severance might not be strictly required, it substantially reduces the risk of a dispute.

Economic Layoffs and Workforce Reduction

Mass layoffs — defined as the termination of 20 or more employees, or employees constituting 10% or more of the total workforce — are subject to additional procedural requirements. The employer must explain the situation to the trade union or to all employees 30 days in advance, consult with the union or employee representatives, and report the layoff plan to the local labor administration authority.

The lawful grounds for a mass layoff are limited to: restructuring under the Enterprise Bankruptcy Law; serious production or operational difficulties; a change in production methods, technical innovation, or business restructuring that makes a reduction in workforce necessary after amending employment contracts; or other major changes in the objective economic circumstances on which the employment contracts were based that make continued performance impossible.

Even where mass layoff grounds exist, the employer must give priority to retaining employees who have longer fixed-term contracts, who have entered into open-ended employment contracts, or who are the sole income earners in a household with elderly or minor dependents. If the employer resumes hiring within six months of a mass layoff, it must notify the laid-off employees and give them priority in rehiring.

Severance is payable in mass layoff scenarios at the standard statutory rate.

Documentation and Procedure Requirements

Documentation is critical in any termination. Chinese labor arbitration tribunals place the burden of proof squarely on the employer. A termination that is substantively justified may nevertheless be ruled unlawful if the employer cannot produce contemporaneous documentation supporting the grounds for termination.

Key documentation for each type of termination includes:

• Probation termination: The written job description or employment conditions provided at the start of employment, signed and dated by the employee; contemporaneous records of performance deficiencies; and a written notice of termination stating the grounds with specificity.
• Termination for cause: The company’s internal rules and regulations, with evidence that they were lawfully adopted (consultation with the trade union or employee representative congress) and communicated to the employee; a written record of the violation, including dates, times, and facts; any warning letters or disciplinary notices previously issued; and a written termination notice.
• Performance-based termination: Performance evaluation records for the relevant period; records of training provided or alternative positions offered; and a written termination notice with a detailed explanation.
• Mutual separation: A written mutual separation agreement signed by both parties, setting out the termination date, the compensation payable, and a comprehensive release of claims.

In all cases, the employer must issue a certificate of termination of employment, process the employee’s social insurance and housing fund account closure or transfer, and settle all outstanding wages, unused annual leave compensation, and severance within the statutory timeframe — generally upon completion of the handover procedures.

Labor Dispute Risks and Arbitration Exposure

Labor disputes in China are resolved through a mandatory arbitration process administered by the Labor and Personnel Dispute Arbitration Commission in the jurisdiction where the employer is registered or where the employment contract is performed. An employee who wishes to challenge a termination must file an arbitration claim within one year of the date on which the employee knew or should have known that their rights had been infringed.

The potential outcomes of a successful employee claim include:

• Reinstatement: The employee is restored to their original position with back pay for the period between termination and reinstatement. If the employee does not wish to be reinstated, the tribunal may instead award double the statutory severance amount as damages.
• Double severance (unlawful termination damages): If the termination is ruled unlawful and the employee does not seek reinstatement, the employer must pay damages equal to twice the statutory severance amount. This is the most common remedy in practice.
• Additional compensation: The employer may also be ordered to pay outstanding wages, unused annual leave compensation, social insurance arrears, and other amounts that would have been due had the employment continued.

Guangdong has a well-developed labor arbitration infrastructure, particularly in Guangzhou and Shenzhen, and the arbitration commissions in these cities handle a high volume of termination-related claims. Foreign employers should assume that a terminated employee who believes they have a colorable claim will file for arbitration, and should prepare the documentary record accordingly from the outset of the employment relationship — not at the point of termination.

Guangdong-Specific Considerations

Guangdong province, encompassing Guangzhou, Shenzhen, Foshan, Dongguan, and Jiangmen, has several distinctive features that affect employment termination:

• Local average salary caps: Shenzhen’s published average salary is independently calculated and is typically the highest in the province. The triple-average cap for severance purposes in Shenzhen is correspondingly higher than in other Guangdong cities. Employers with operations in multiple Guangdong cities should calculate severance caps based on the specific city where the employee is registered for social insurance purposes.
• Guangdong provincial regulations: The Regulations of Guangdong Province on the Implementation of the Labor Contract Law contain supplementary provisions on termination procedures that employers must observe in addition to the national Labor Contract Law. These include requirements concerning the format and content of termination notices and the documentation to be filed with the local labor bureau.
• Severance calculation conventions: Some Guangdong labor arbitration tribunals include bonuses and allowances in the severance calculation base more broadly than tribunals in other provinces. Employers should obtain local advice on the calculation base before finalizing a termination package.
• Enforcement environment: Labor law enforcement in Guangdong’s major cities is active and well-resourced relative to many other Chinese provinces. A termination that the employer does not document properly is likely to be challenged and is likely to result in an adverse ruling.

How Dan Young Business Consultancy Can Help

Dan Young Business Consultancy advises WFOEs and foreign-invested enterprises across Guangdong — including Guangzhou, Shenzhen, Foshan, Dongguan, and Jiangmen — on all aspects of employment termination. Our services include:

• Pre-termination assessment: reviewing the grounds for termination, identifying protected employee categories, and advising on the likelihood of a successful arbitration challenge
• Severance calculation: computing the correct statutory severance amount based on the employee’s salary history, years of service, and applicable local caps
• Mutual separation agreement drafting and negotiation: preparing legally robust separation agreements with comprehensive releases, and managing the negotiation process with the employee
• Documentation preparation: ensuring the employer’s internal records — employment contracts, job descriptions, performance evaluations, disciplinary records, and termination notices — meet the evidentiary standards required by Guangdong labor arbitration tribunals
• Mass layoff advisory: preparing the documentation required for consultation with the trade union or employee representatives and for notification of the local labor bureau
• Arbitration representation: defending the employer in labor arbitration proceedings arising from a challenged termination

With more than 100 work visas processed and extensive experience across the full spectrum of HR compliance for foreign-invested enterprises in Guangdong, our team is well positioned to help your WFOE manage employment terminations lawfully and with reduced risk. Contact us at [email protected] or call +86 18565453956 to discuss your specific situation.